The last half of 2007 and the beginning of 2008 have drawn many to make comparisons with agricultural economy that existed in the 1970s, with record grain prices, high farm profits and rapid increases in land values. Here are some things to consider:
July soybean futures on the Chicago Board of Trade (CBOT) traded at a record price of $12.93/bu. on Jan. 3, breaking the old record price of $12.90/bu., which was set in 1973.
July corn futures have edged very close to $5/bu., which is approaching the record price that was set in 1996.
USDA has projected net farm income in the U.S. for 2007 at $87.5 billion, which is up $28.5 billion from 2006. The estimated gross value of 2007 crop production is estimated at $148.5 billion and livestock production at $140 billion, which are also both records.
Overall U.S. farm debt-to-asset ratio is now estimated at about 10%, which is the lowest in decades; the total farm-based equity (net worth) in the U.S. is now estimated at over $42 trillion – the highest ever.
Exports of farm products are estimated to be $91 billion in 2008 – the highest ever – and represents a $22.5 billion increase in the past two years. The rapid increase in the export markets is being driven by the lower value of the U.S. dollar and rapidly increasing middle-class population in many developing countries around the world.
Land values in Iowa were up 22% at the end of 2007, compared to a year earlier, which is the largest single-year increase in land values since 1976, and has only been exceeded by land value percentage increases in 1973, 1974 and 1975.
Land rents for cash rental contracts in most areas of the Midwest are expected to be up 10-25% for 2008, as compared to a year earlier, and will have increased 40-60% in the last three or four years in many areas.
Everyone is bullish on the future of profitability in production agriculture. It is hard to find anyone talking about a potential downturn in the agriculture economy anytime soon.
Usually, when everyone is thinking one direction is when things change, and sometimes that change can occur quite rapidly. Just look what happen to the home real estate market across the U.S. in the last 12-18 months. In 1979, the U.S. Government implemented a grain embargo that caused a rapid decline in grain exports and resulted in much lower grain prices. This rapid drop in grain prices, along with lower farm profits and much higher interest rates, led to the farm crisis of the 1980s. While economic conditions in the U.S. are much different that the late 1970s and early 1980’s, there are some yellow caution flags to think about with today’s agriculture economy:
The cost of production for corn and soybeans for seed, fertilizer, chemicals and fuel is expected to increase 20-25% for 2008, and will be nearly double the cost of production in 2000.
The increased cost of production, combined with the higher land rents in most areas, means that the breakeven price for corn production is now over $3/bu. for corn, and $7.50/bu. for soybeans – something to keep in mind if the grain prices start to drop rapidly.
What will happen to grain prices if export markets start to soften in the coming months, or if there is reduced grain demand for livestock production or renewable fuel production?
If I buy land at today’s prices, will that land purchase still be economically viable at $2.75-3/bu. corn prices and $7-7.50/bu. soybean prices?
What would be the impact on grain prices, land values, the farm economy, etc. of some world-wide event – such as a terrorist attack, bird flu,etc. – occurs in the next 12-18 months?
Is your farm business adequately prepared from a risk-management standpoint to withstand a downturn in the agriculture economy in the next one to two years?
Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.
